SUPPLY CHAIN (SC) DRIVERS AND OBSTACLES

Drivers of SC performance

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

The discussion here is mainly concerned with how these drivers are used in the
design, planning and operation of supply chain

Facilities

places where inventory is stored, assembled, or fabricated

production sites and storage sites

Decisions regarding location, capacity and flexibilities of facility have a significant

impact on SC performance

Inventory

raw materials, WIP, finished goods within a supply chain

Changes in inventory policies can dramatically alter the efficiency and responsiveness
of a SC

Transportation

moving inventory from point to point in a supply chain

combinations of transportation modes and routes can affect the performance of SC

Information

data and analysis regarding inventory, transportation, facilities throughout the supply
chain

potentially the biggest driver of supply chain performance

This driver allow the management with the better opportunity to make the SC more
responsive and efficient

Sourcing

Distinguish the functions a firm performs and functions that are outsourced

Pricing

Price associated with goods and services provided by a firm to the supply chain

24
National Institute of Technology Calicut

Department of Mechanical Engineering

A Framework for Structuring Drivers

The combined impact of these drivers determine responsiveness and efficiency of the
entire SC

SC strategy determines how the supply chain should perform with respect to efficiency
and responsiveness

SC then use the supply chain drivers to reach the performance level the SC strategy
dictates

C om petitive Strategy
Supply C hain
Strategy
E fficiency

R esponsiveness

Supply chain structure

Logistical D rivers

F acilities

Inventory

Transportation

Inform ation

Sourcing

Pricing

C ross Functional Drivers

Facilities

Role in the supply chain

the where of the supply chain
manufacturing or storage (warehouses)
Role in the competitive strategy
economies of scale (efficiency priority)
larger number of smaller facilities (responsiveness priority)
Components of facilities decisions

Components of Facilities Decisions

Location

centralization (efficiency) vs. decentralization (responsiveness)

other factors to consider (e.g., availability of quality workers, infrastructure,

proximity to customers)
25
National Institute of Technology Calicut

Department of Mechanical Engineering

Capacity (flexibility versus efficiency)

Manufacturing methodology (product focused versus process focused)

Warehousing methodology (SKU storage, job lot storage, cross-docking)

Overall trade-off: Responsiveness versus efficiency

Inventory

Role in the supply chain

Role in the competitive strategy

Components of inventory decisions

Inventory: Role in the Supply Chain

Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness

Impact on

material flow time: time elapsed between when material enters the supply chain to
when it exits the supply chain

throughput
rate at which sales to end consumers occur

I = RT (Littles Law)
I = inventory; R = throughput; T = flow time

Inventory and flow time are synonymous in a supply chain

Inventory: Role in Competitive Strategy

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of

inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

Components of Inventory Decisions

Cycle inventory

Average amount of inventory used to satisfy demand between shipments

Depends on lot size

Safety inventory

inventory held in case demand exceeds expectations

costs of carrying too much inventory versus cost of losing sales

Seasonal inventory

inventory built up to counter predictable variability in demand

cost of carrying additional inventory versus cost of flexible production

26
National Institute of Technology Calicut

Department of Mechanical Engineering

Overall trade-off: Responsiveness versus efficiency

more inventory: greater responsiveness but greater cost

less inventory: lower cost but lower responsiveness

Transportation

Role in the supply chain

Role in the competitive strategy

Components of transportation decisions

Transportation: Role in the Supply Chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

Also affects inventory and facilities

Transportation: Role in the Competitive Strategy

If responsiveness is a strategic competitive priority, then faster transportation modes can

provide greater responsiveness to customers who are willing to pay for it

Can also use slower transportation modes for customers whose priority is price (cost)

Can also consider both inventory and transportation to find the right balance

Components of Transportation Decisions

Mode of transportation:

air, truck, rail, ship, pipeline, electronic transportation

vary in cost, speed, size of shipment, flexibility

Route and network selection

route: path along which a product is shipped

network: collection of locations and routes

In-house or outsource

Overall trade-off: Responsiveness versus efficiency

Information

Role in the supply chain

Role in the competitive strategy

Components of information decisions

Information: Role in the Supply Chain

The connection between the various stages in the supply chain allows coordination
between stages
27
National Institute of Technology Calicut

Department of Mechanical Engineering

Crucial to daily operation of each stage in a supply chain e.g., production scheduling,
inventory levels

Information: Role in the Competitive Strategy

Allows supply chain to become more efficient and more responsive at the same time
(reduces the need for a trade-off)

Information technology

What information is most valuable?

Example 3.4: Andersen Windows

Example 3.5: Del

Components of Information Decisions

Push (MRP) versus pull (demand information transmitted quickly throughout the supply
chain)

Coordination and information sharing

Forecasting and aggregate planning

Enabling technologies

EDI

Internet

ERP systems

Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

Sourcing

Role in the supply chain

Role in the competitive strategy

Components of sourcing decisions

Sourcing: Role in the Supply Chain

Set of business processes required to purchase goods and services in a supply chain

Supplier selection, single vs. multiple suppliers, contract negotiation

Sourcing: Role in the Competitive Strategy

Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain

In-house vs. outsource decisions- improving efficiency and responsiveness

Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain

In-house vs. outsource decisions- improving efficiency and responsiveness

28
National Institute of Technology Calicut

Department of Mechanical Engineering

Components of Sourcing Decisions

In-house versus outsource decisions

Supplier evaluation and selection

Procurement process

Overall trade-off: Increase the supply chain profits

Pricing

Role in the supply chain

Role in the competitive strategy

Components of pricing decisions

Pricing: Role in the Supply Chain

Pricing determines the amount to charge customers in a supply chain

Pricing strategies can be used to match demand and supply

Pricing: Role in the Competitive Strategy

Firms can utilize optimal pricing strategies to improve efficiency and responsiveness

Low price and low product availability; vary prices by response times

Components of Pricing Decisions

Pricing and economies of scale

Everyday low pricing versus high-low pricing

Fixed price versus menu pricing

Overall trade-off: Increase the firm profits

Obstacles to Achieving Strategic Fit

A companys ability to find a balance between responsiveness and efficiency that best
meet the needs of the targeted customer is the key to achieving strategic fit

Companies face many obstacles in deciding where this balance is to be located on the
responsiveness spectrum

Obstacles

Increasing variety of products

Decreasing product life cycles

Increased variety (mass customization) tend to raise uncertainty, and uncertainty

frequently results in increased cost and decreased responsiveness
This makes the job of achieving strategic fit more difficult as supply chain must
constantly adapt to manufacture and deliver new product in addition to coping with
these products demand uncertainty

Increasingly demanding customers

29
National Institute of Technology Calicut

Department of Mechanical Engineering

Todays customers are demanding faster fulfillment, better quality and better
performing products for the same price they paid years ago means that the supply
chain must provide more just to maintain its business

Fragmentation of supply chain ownership

Now-a-days most firms have become less vertically integrated

More members in supply chain for providing goods

Many owners with its own policies and interests, the chain (network) more
complicated to coordinate

Globalization

Supply chains are more global

Global supply chains creates many benefits such as ability to source from a global
base of suppliers who may offer better or cheaper goods than were available in a
companys home nation

Suppliers are apart making coordination much more difficult

Removal of trade barrier results in increased competition from global companies

Companies that once protected has to find time for responding to needs of customer
that arise due to competition

Now more strain on supply chain better trade-off

Difficulty executing new strategies

Creating successful strategy is not easy

Skillful execution of strategy is as important as creating successful strategies

For instance others could figure out Toyotas brilliant strategies; the difficulty was in
executing that strategy

30
National Institute of Technology Calicut

Department of Mechanical Engineering